Sweetwater’s Own Calculations Showed District Could Go Bust Long Before Fiscal Crisis

Education UNVEILING THE UNSEEN

Sweetwater’s Own Calculations Showed District Could Go Bust Long Before Fiscal Crisis

Sweetwater Union High School District officials have long maintained that their current fiscal crisis emerged swiftly, almost out of nowhere, last September. But new emails and documents show high-level administrators actually became aware of an impending crisis months earlier and failed to prevent it.

San Ysidro High School students protest bus route cuts due to Sweetwater Union High School District’s budget crisis. / Photo by Adriana Heldiz

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Sweetwater Union High School District officials have long maintained that their current fiscal crisis emerged swiftly, almost out of nowhere, last September. But new emails and documents show high-level administrators actually became aware of an impending crisis months earlier and failed to prevent it.

A previous audit traced the district’s current budget trouble back, in part, to “unsustainable salary increases” in spring 2017. District administrators have long maintained those raises appeared to be affordable at the time. But the new emails, obtained by Voice of San Diego in a Public Records Act request, show district officials knew the raises could put the district’s budget underwater very rapidly.

The district’s then-chief financial officer Karen Michel was scheduled to take the projections to an upcoming cabinet meeting with the district superintendent, according to the emails.

Sweetwater spokesman Manny Rubio did not say whether Superintendent Karen Janney ever heard or saw the projections. “I can’t say specifically,” he told me. “We talk about finance at pretty much every cabinet meeting. I don’t know if these specific [documents] came up.”

Despite the dire projections, district staff recommended that Sweetwater’s board members approve the raise that spring. They approved a 5.25 percent increase to salary costs. Board Trustee Paula Hall has previously said if she thought the raises were unsustainable, she would not have voted to approve them.

Sweetwater’s current fiscal dilemma is the result of more than $30 million in overspending during the 2017-18 school year. The overspending – which district officials say was not evident until it suddenly revealed itself in September 2018 – has led to ongoing budget cuts, including reductions in staffing, transportation, technology and teacher planning time. Meanwhile, student protests have sprung up around the district’s fiscal mismanagement with protestors demanding district leaders be held accountable.

On March 6, 2017, the district’s then-finance director, Doug Martens, emailed Michel. Martens sent projections on how the raise proposal then on the table would impact the budget.

“You will notice the ending balance for 16/17 would be $17.4 million, by 17/18 it drops to $964,590, and by 18/19 it drops to [negative] ($14.1 million),” he wrote, referring to upcoming school years. An attached spreadsheet backs up the math.

 

All districts are required by state education code to keep a certain percentage of funds in reserve for emergencies. Sweetwater is required to keep roughly $9 million. Martens’ math shows Sweetwater would have been without its required reserves within one year of the raises and would have been well underwater within two years.

He was not far off. The district approved the raises and by the end of the 2017-18 school year, the district was roughly $4 million in the hole.

Martens’ calculations were based on a 7.25 percent raise. But in the end, board trustees approved what amounted to a 5.25 percent raise.

That means the impact to Sweetwater’s books would be 2 percent less than Martens calculated. But even 5.25 percent was enough to break the bank. Based on Sweetwater’s own calculations, 2 percent of payroll equates to a little less than $8 million. So even when shaving 2 percent (or $8 million) from Marten’s calculations, the district still ends up with a deficit within just two years.

Rubio said he was unsure if the district created projections based on the 5.25 percent raise that would be publicly available. Sweetwater is still processing Voice of San Diego’s records request for all projections related to the 2017 raises.

Rubio also disputed the relevance of Martens’ calculations. He suggested that 1.5 percent of the raises were charged to a separate funding source, known as state supplemental and concentrations grants, which Martens wasn’t factoring into his calculation.

But according to the state Department of Education website supplemental and concentration grants fall under Local Control Funding Formula funds. A side-by-side comparison of Sweetwater’s budget documents show Martens considered upwards of 99.9 percent of the proposed Local Control Funding Formula funds for that year.

A separate state funding allocation document shows Martens’ calculations were within 97 percent of the full amount of base and supplemental state funding Sweetwater received from the state in 2016-17. But even if there were a way to shave an extra 1.5 percent from Martens’ projections, the district would still be in danger of insolvency within three years.

Both Martens and Michel retired from the district not long before Sweetwater’s financial problems were revealed. District officials have said neither retirement was connected to the flawed bookkeeping.

The 5.25 percent raises hit the books in July 2017, just as the new fiscal year began. Sometime during that school year Martens began making what are known as one-sided entries in the district’s budget, according to auditors with the Fiscal Crisis and Management Assistance Team, an independent state agency. The entries made it look as if the district was spending less money than it actually was. In other words, the entries mitigated the effect of the raises.

More than one employee noticed that the budget was seriously miscalculated, according to the fiscal crisis team auditors. Those employees brought their concerns to Martens and Michel, as Voice of San Diego first revealed in February.

At a press conference last May, Janney, the superintendent, repeatedly refused to say whether Martens or Michel had informed her that the budget was seriously flawed. Rubio, the spokesman, has repeatedly said district officials only learned of the overspending last September.

During a separate voluntary audit in 2015, officials with the fiscal crisis team warned Sweetwater not to raise its costs, or give substantial raises, without raising revenue. Sweetwater officials said state revenues increased after that time and they believed the raises to be well within their budget. But Martens’ 2017 projections show that top finance workers had access to real time information suggesting the raises were unaffordable.

The new emails still do not definitively show who outside the finance department knew of Sweetwater’s unsustainable spending. But they show that Michel and Martens, the No. 1 and 2 members of the finance department, planned to take their concerns as high as the district cabinet, which includes department heads and the superintendent. Neither Martens nor Michel have returned multiple phone calls to numbers listed in their names.

Two independent investigations, one by the fiscal crisis team and another by the U.S. Securities and Exchange Commission, are currently examining whether Sweetwater officials may have committed fraud in their financial dealings. The fiscal crisis team’s report is due before the end of the year.

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